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In Travelers v. United States Filter, the Indiana Supreme Court gave life to the anti-assignment clause in a long-tail liability case. Rejecting policyholders’ arguments that assignment as a matter of law by transfer of the asset did not increase insurers’ risks—the evident purpose of the anti-assignment clause—for liabilities arising from occurrences which took place long ago, the Court held that the insurers were off the hook. The decision is published at 895 N.E.2d 1172 (Ind. 2008). A copy of the ruling is attached.
In general terms, if the insured company continues or is merged into the successor, the coverage will follow. But if assets or liabilities are purchased, the assignment clause must be respected. Companies acquiring businesses must be especially careful to assess the transferability of the predecessor’s insurance. It is not known if insurers will ever consent, or have ever consented, to such an assignment. Acquirers may have to resort to other measures to preserve coverage in these circumstances.
Plews Shadley Racher & Braun LLP filed a brief on behalf of amicus curiae in U.S. Filter. The Indiana Court of Appeals—which had ruled that anti-assignment clauses merely prevent “the transfer of the insurance policies,” not transfer of the “right to coverage” under them—quoted extensively from the firm's amicus brief in its 2007 decision:
We find persuasive the considerations offered by amicus curiae National Solid Wastes Management Association (“NWA”) and Indiana Petroleum Marketers and Convenience Store Association (“IPCA”), who offer that the smooth flow of assets from one entity to another by way of merger or acquisition is integral to the functioning of a modern free market economy. The fact that liabilities commonly are moved from one entity to another in mergers and acquisitions has a societal impact both positive and negative. When unexpected liabilities overwhelm acquirers, jobs and savings are lost. Liabilities, especially “long-tail liabilities” (as is the case with asbestos, silica, and the like) usually are unexpected and have not been priced into the bargain. On the positive side, allowing liabilities to survive, protects innocent victims, and aligns the costs and benefits of economic activity. If liabilities could be shed by way of transaction, there would be a temptation to engage in evasive reshuffling that could leave the public to bear the externalities.
The main means through which entities insure against the unexpected losses caused by liability is to purchase insurance. Insurance must be broad to serve its function. It would be reckless to undertake an acquisition if it were impossible for a business to insure against historic liabilities that may come with the new asset, especially when a purchaser could not purchase insurance to retroactively cover a past loss. See Henkel, 62 P.3d at 952 (Moreno, J., dissenting) (“It is highly unlikely that a successor company would be able to obtain insurance coverage for injuries that have already occurred before the successor’s acquisition of the business.”) (emphasis in original).
An insurance company would be foolish to consent to the transfer of insurance if, by withholding such consent, it could shed itself of past liability. Further, it would be unfair for a company that retains its assets to have coverage for a latent injury while one who acquires the same insured assets would get no comparable coverage for past occurrences. This failure of insurance to follow would essentially be a restraint on alienation, which is not favored in law. See First Sav. and Loan Ass’n of Cent. Indiana v. Treaster, 490 N.E.2d 1149, 1152 (Ind. Ct. App. 1986), trans. denied.
The realities of the market place must ensure that assets are freely transferable. If an insurer could effectively prevent such transfers by failing to consent to the assignment of a liability policy (and no insurer would agree to the assignment where it could avoid liability for insured occurrences by refusing to consent), this public policy would be undermined.
The Court of Appeals' focus on Plews Shadley Racher & Braun LLP's brief shows the real value that can be added by amicus participation.
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